Did a Statement Today by Fed President Williams Cause a Sell-off in Gold?

Gold Futures Dip Following Anticipated Fed Pivot: Dollar Strength Leads to Decline

After trading to a high of $2059.60 today, gold futures closed lower. As of 4:20 PM, gold futures basis the most active February 2024 contract is down $17.90 or 0.87% and fixed at $2033.40. Today’s selloff follows two days of strong gains that occurred immediately after the conclusion of this month’s FOMC meeting. On Wednesday, gold futures opened at $1995 and surged higher by $48.10 closing at $2043.30. Yesterday gold gained an additional $8.20 after trading to a high of $2062.90 and closing at $2051.30.

The price surge that occurred on Wednesday and Thursday was in response to the release of the FOMC statement, Summary of Economic Projections (SEP), and comments by Chairman Powell on Wednesday. All the information from the Fed indicated a major pivot in their monetary policy.

This pivot from interest rate hikes by the Federal Reserve to combat spiraling inflation above 8 ½% in March 2022 has been highly anticipated recently. Their aggressive pivot to a restrictive monetary policy included 11 rate hikes, taking their benchmark interest rates from near zero to between 5 ¼% and 5 ½ % in just over a year. Although the Federal Reserve stopped raising rates a few months ago and announced a series of rate hike pauses, comments by Federal Reserve officials remained close to the chest avoiding any information about when they planned to begin rate cuts.

That changed on Wednesday with the release of their economic projections which contained detailed information revealing that central bank officials almost unanimously are anticipating interest rate cuts to begin next year, with the expectations of a ¾% cut taking Fed funds rates to approximately 4.6%.

The immediate reaction was a strong decline in the dollar, which set into motion strong gains in gold as a result of bullish market sentiment and dollar weakness. Today, dollar strength was all that was needed for traders to pull profits on the recent advance in gold prices. The dollar gained 0.62% and gold dropped by 0.88% revealing that today’s price decline in gold futures was primarily due to dollar strength with a smaller component the result of market participants actively selling gold.

Interpreting Gold’s Direction: Assessing the Significance of Recent Price Corrections

The question becomes whether this will be a one-off or a pivot from the recent gains in gold, or the beginning of a price correction. An important factor in today’s price decline was a recent statement by New York Fed President Williams. Speaking on CNBC’s Squawk Box today, Williams said, “We aren’t really talking about rate cuts right now,”.

This contrasts with Chairman Powell’s comments on Wednesday, as well as the dot plot that was released on Wednesday. The dot plot revealed that there were only two voting members who did not believe they would cut rates next year, making this author believe that Fed President John Williams was one of those two voting members, and if so, he represents a small minority.

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Wishing you as always good trading,

Gary S. Wagner